uCloudlink Group Inc. (UCL) Q1 2022 Earnings Call Transcript

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uCloudlink Group Inc. (UCL -2.79%)
Q1 2022 Earnings Call
May 31, 2022, 8:30 a.m. ET

Contents:

• Prepared Remarks
• Questions and Answers
• Call Participants

Prepared Remarks:

Operator

Hello, and welcome to uCloudlink Group Inc.'s first quarter 2022 earnings conference call. [Operator instructions] I would now like to turn the conference over to Jillian Zeng, investor relations of the company.

Jillian Zeng -- Investor Relations

Thanks, everyone for joining us on our first quarter 2022 earnings call today. The earnings release is now available on our IR website at ir.ucloudlink.com as well as via newswire services. I will give a brief introduction to our uCloudlink management team. Zhiping Peng is our co-founder and chairman of board of directors; Chaohui Chen is our co-founder, director, and chief executive officer; Yimeng Shi is our chief financial officer; Zhu Tan is our vice president of marketing and sales.

Our CEO will begin with an overview of our company and business highlights, which will cover Section 1 of the earnings presentation posted on our IR website. Our CFO, Yimeng Shi, will then discuss our operation, highlights, and financial results as presented in Sections 2 and 3. Before we proceed, please note that this call may contain forward-looking statements made pursuant to the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995. These forward-looking statements are based on management's current expectations and observations that involve known and unknown risks, uncertainties, and other factors not under the company's control, which may cause actual results, performance, or achievements of the company to be materially different from the results, performance or expectations implied by these forward-looking statements.

All forward-looking statements are expressly qualified in their entirety by the cautionary statements, risk factors, and details of the company's filings with the SEC. The company does not assume any obligation to revise or update any forward-looking statements as a result of new information, future events, changes in market conditions, or otherwise, except as required by law. Please also note that uCloudlink's earnings press release and this conference call include discussions of unaudited GAAP financial information as well as unaudited non-GAAP financial measures. uCloudlink's press release contains a reconciliation of the unaudited non-GAAP measures to the unaudited most directly comparable GAAP measures.

I will now turn the call over to our Co-Founder and CEO, Mr. Chaohui Chen.

Chaohui Chen -- Co-Founder, Director, and Chief Executive Officer

Thank you. Page 4 to Page 12 are similar contents as the earnings presentation of the fourth quarter of year 2021. We still encourage you to review in the Quarter 1 year 2022 earnings presentation uploaded to our Investor Relations website with some latest updates. Hence, I will not elaborate on the parts similar with Quarter 4 earnings result, but will instead focus on our most recent developments in the first quarter.

Please turn to Page 13. uCloudlink 1.0 is our international data connectivity services business, which has had a strong track record of high gross margins and profitability with ongoing growth potential. We have established an intelligent wholesale to retail repackaging solution to minimize unit cost of data traffic. In that, as data packages of single operator or cross mobile network operators, mobile virtual network operators are priced differently.

This is attributable to our large SIM card pool and our ability to acquire data packages at local wholesale prices from operators and partners. We further differentiate ourselves with our multi-network reselection and combination technologies, which could ensure high-quality data connectivity and an improved user experience. uCloudlink 1.0 business monetization model includes retail To C, rental or selling to the end user, wholesale To B, for business partners, and our PaaS and SaaS services such as CRM, billing management, devices selling, and rental management, etc. For wholesale To B, we can act as a reseller or provide commission services to our business partners.

We allow our business partners to share data traffic pools through our PaaS and SaaS platform and charge a commission fee. During the first quarter of year 2022, our 1.0 business revenues has slightly increased by 2.2% compared to the same period in year 2021. As international travel restrictions around the world continue to abate over time, the number of daily active terminal, DAT, for the 1.0 business has increased during the first quarter of year 2022, indicating that more and more customers are using our products and services. With an increasingly diversified geographic market composition, we are positive that the revenues from 1.0 business will steadily grow and exceed pre-COVID level in the future.

We will continue to develop and enrich our 1.0 product offerings. Our goal, as always, is to provide the best quality products and services for our global customers, which ensure better international data connectivity. Let's move to Page 14. uCloudlink 2.0 is our local data connectivity services business and has become a new driver of revenue growth since year 2020.

Its business monetization model is similar to that of uCloudlink 1.0 with a massive potential local user base. Our new HyperConn technology contributes to the further development and growth of our uCloudlink 2.0 business. We have expanded the business scope of our local data connectivity services. Currently, our innovative HyperConn technology is widely accepted by mobile network operators and business partners in various industries with great growth potential, such as with local partners in China, U.S., and Japan.

In the past quarters, we have continued to strengthen our presence in our existing markets, including Japan, North America, Southeast Asia where we helped operators improve their data services and solve data connection problems through our PaaS and SaaS platform. We provide high-quality data connection for 5G applications in response to the increased demand for better connectivity devices -- services. Furthermore, as people get used to the new normal, our products and services provide better performing solutions for remote work and learning which require reliable connectivity as well. We adapt ourselves to the evolving market by introducing innovative products to address various 2.0 business application scenarios.

During the first quarter of year 2022, our various IoT solutions, which have successfully started to gauge customers' interest and have been perceived as reliable and high-quality data connectivity services in markets like Japan and North America, achieved further recognition. Our revenues from 2.0 business increased 185.4% compared to the same period in prior year. Our customers were able to realize the reduced operating costs and improved data connectivity experiences through these cutting-edge IoT solutions and we continue to focus on exploring new business prospects to serve a broader spectrum of partners with IoT needs. We expect our 2.0 business to grow with the support of our innovative cloud SIM and HyperConn technology as we continue to introduce our solutions, services, and products to the markets and strengthen our collaborations with local partners.

Let's move to Page 15. Based on our innovative cloud SIM and HyperConn technology solution, we continue to develop and broaden our portfolio of offerings with new products and services, such as our self-developed terminals and third-party devices. Our HyperConn technology solution has been well perceived and related products including industry Wi-Fi router, IP Camera, power, emergency services, live broadcasting, e-commerce, autopilot, augmented reality and virtual reality, AR/VR and clouding computing, etc., are gaining recognition, proven by a growing user base across a wide spectrum of industries. In the first quarter of year 2022, we promoted more innovative 5G products in countries and regions such as the U.S., Japan, and Europe.

Furthermore, we have a leading global 5G roaming solution, which is an easy roaming solution for carriers and we are one of few companies that could provide 5G products with global bands. This reflects our market confidence and continuous efforts on elevating user experience as these new products, equipped with our innovative 5G technologies, marks not only the gradual recovery, but also a new beginning for our growth path in the post-pandemic era. In terms of IoT side, we applied GMI, GlocalMe Inside solution, in IP Camera commercially. And it has been promoted among multiple markets.

Going forward, we plan to launch more of these types of innovative products and services. uCloudlink positions itself as the pioneer technology solution provider in the data connectivity market. Through our mature 1.0 business and newer 2.0 business, uCloudlink is promoting the long-term development of the PaaS and SaaS ecosystem, which have been recognized by various business partners, as showed in its increased revenue contribution by 7.8% in first quarter of year 2022. Additionally, we have entered two new regional markets during the period.

PaaS and SaaS platform is built upon uCloudlink 1.0 and 2.0 business lines. And its growth replies on our ability to construct a healthy ecosystem. This requires our non-stop efforts in maintaining and expanding a strong partnership base, which includes mobile network operators, mobile virtual network operators, SIM card providers, our business customers, and more. We remain confident in our business development team to empower the building of our PaaS and SaaS ecosystem, and in our research and development team to address diversified needs our customers have posed to us.

In the remainder of year 2022, we expect PaaS and SaaS platform revenues to grow into a more significant driver of uCloudlink's business and continues to enlarge its marginal effects and improve margin profiles. We were able to reduce operating expenses and decrease the net loss through streamlining our business operations, including optimizing labor costs compared to the first quarter of year 2021. Going forward, we expect to further lower operating costs as a way to improve our operating and financial performance. We believe that from connected to better connection, uCloudlink is a significant driving force in the transformation of the increasingly advanced information era.

We are committed to building a more connected future for more customers and users and will strive to make a positive impact in serving the global user community. I will now turn it over to our CFO, Yimeng Shi, who will go through business and financial highlights.

Yimeng Shi -- Chief Financial Officer

Thank you, Mr. Chen. Hello, everyone. Let us turn to Page 17 for our business highlights.

The left-hand side of the slide shows daily active terminals, DAT, as of March 31, 2022. Average daily active terminals in the first quarter were 273,870, out of which 1,430 is owned by the company and 272,440 owned by our business partners, representing an increase of 33.5% from 205,082 in the first quarter of 2021. Our uCloudlink 2.0 service accounted for around 69.5% of the total DAT during the first quarter of 2022. Average daily data usage per terminal was 1.74 gigabyte in March 2022.

Let us turn to Page 18 which shows global diversification of our business. We had around 96% of total revenue from outside Mainland China. During the first quarter of 2022, Japan contributed to around 40% of total revenue. For other countries' revenue, the U.S.

market had the largest contribution to our business with further development of our U.S. business and we will continue to expand other markets such as Europe and Southeast Asia, etc. During the first quarter of 2021, we had 6% of total revenue coming from Mainland China, 58% of total revenue coming from Japan, and 36% of total revenue coming from other countries and regions. Let us turn to Page 20.

I will go through our financial highlights of the first quarter of 2022. Service-related revenue as a percentage of total revenue was 62.9% during the first quarter of 2022, compared with 47.4% during the first quarter of 2021. Revenues from local data connectivity service and PaaS and SaaS services increased 185.4% and 7.8% year over year respectively. This increase was primarily due to the expansion in the number of our business partners that use our PaaS and SaaS services to provide local data connectivity services.

Revenues from PaaS and SaaS as a percentage of total revenue also increased to 15.8% during the first quarter of 2022 compared with 12.9% during the first quarter of 2021. Let us move to Page 21 which shows the revenue breakdown of our two business segments, namely revenue from services and sales of products. Our total revenue decreased by 11.8% from $17.7 million in the first quarter of 2021 to $15.6 million in the first quarter of 2022, due to the negative impact of local COVID-19 resurgences and subsequent lockdowns in certain cities in China, including where our main manufacturers are based, which has impacted our revenues from sales of products. Revenue from services were $9.8 million, representing an increase of 17.2% from $8.4 million for the same period of 2021.

This increase was primarily attributable to the increase in revenues from local data connectivity services. Let's turn to Page 22 for gross margin of our business. Our services gross margin increased to 49% in the first quarter of 2022, compared to 35.9% in the first quarter of 2021 and our overall gross margin was 37.4% in the first quarter of 2022, increased from 31.3% during the same period 2021. The increase of our services gross margin during the first quarter of 2022 was primarily attributable to the increase of our PaaS and SaaS service revenue and data connectivity service via e-commerce retailing sales, both of which have higher gross margins over other business lines.

Let us move to Page 23 which shows the breakdown of our operating expense, excluding share-based compensation and others. Excluding share-based compensation, operating expense as a percentage of total revenue was 60% in the first quarter of 2022, compared with 71% during the first quarter of 2021. We had further streamlined our business operation, including optimizing labor costs. And our total operating expenses, excluding share-based compensation, were decreased to $9.3 million in the first quarter of 2022, compared to $12.6 million in the same period of 2021.

Let us turn to Page 24. Operating cash flow was negative $4.4 million during the first quarter of 2022, compared to negative $6.7 million during the first quarter of 2021. Our cash and cash equivalents and short-term deposits were $11.2 million as at March 31, 2022. Our capex was $6,000, compared to $0.1 million in the same period of 2021.

Let us move to Page 25. Net loss during the first quarter of 2022 was $7.9 million, compared to $15.4 million during the first quarter of 2021. Adjusted EBITDA was negative $3.9 million during the first quarter of 2022, compared to negative $6.7 million during the first quarter of 2021. As mentioned above, the company is working toward improving its bottom-line results and financial position.

With that, let me conclude today's presentation. Thank you, and we'll start our Q&A session.

Questions & Answers:

Operator

[Operator instructions] The first question comes from Vivian Zhang with Diamond Equity Research. Please go ahead.

Vivian Zhang -- Diamond Equity Research -- Analyst

Good evening. This is Vivian Zhang from Diamond Equity Research. Thanks for taking my questions. So my first question is that can you give us some additional color on your Internet of Things solution and its market opportunity?

Chaohui Chen -- Co-Founder, Director, and Chief Executive Officer

Yeah. So --

Yimeng Shi -- Chief Financial Officer

Mr. Chen, can you answer the question?

Chaohui Chen -- Co-Founder, Director, and Chief Executive Officer

Yeah. So for international business, we believe we can see that from the DAT. We can see the first quarter of year 2022. We can see that data is a recovery.

So DAT is increased. So that's the data performance. From our product side, we not only had the normal cloud SIM solution, now we have had HyperConn solution has convinced that we can provide much better experience for market network handover from the more than 10 seconds, now can go to the mini second. That's one of the new product, new service.

Another is for 5G. We provide a 5G product. So we are now very few vendor, almost it's only one vendor who can provide a global 5G network roaming. So because our 5G product with almost all countries' 5G radio band and also the 5G roaming capability looks very well in the industry.

So all these preparations led us in a good position in a recovery after COVID-19. So I think we are in a good position.

Vivian Zhang -- Diamond Equity Research -- Analyst

OK. OK, I see. So my second question is regarding the COVID-19 impact. We've seen some Chinese cities like Shenzhen reopen in the second quarter after the lockdown, but there are still some controls may still be in place in these cities.

So do you think there will be some recovery in revenues from sales of products in the second quarter or those controls continue to affect your launch and manufacturing of 5G products given that your main manufacturers are based in Guangdong, China?

Chaohui Chen -- Co-Founder, Director, and Chief Executive Officer

Yes. It has impacted the fourth quarter, especially both the Shenzhen and Shanghai because this supply chain or the part of our supply chain is in -- based in the Shenzhen and some part of our partner is based in Shanghai. It is impacted by the lockdown of the -- during the COVID-19 in China. But I think we can see that in Guangdong, it's early recovery.

I think the second quarter is not any problem from the COVID scenario. Also, we are -- also we removed some of our supply chain from Shanghai to Shenzhen. So in the second quarter, we believe the impact from the COVID-19 will be almost it disappeared, [Inaudible] impact by the Quarter 1. Quarter 2, we can see is much, much better.

So that's one of the situation. Another is because our fourth quarter -- our new device product delivery is impacted because of lockdown in the fourth quarter for manufacturer. And also it's -- because this quarter is the first quarter of the revenue and delivery, the source order has come from the last quarter in the year and Quarter 4. Quarter 4 is heavily impacted by the omicron variant of COVID-19.

So I think second quarter will be much better.

Vivian Zhang -- Diamond Equity Research -- Analyst

OK. That's all. Thank you.

Operator

[Operator instructions] This concludes our question-and-answer session. I would like to turn the conference back over to Jillian Zeng for any closing remarks.

Jillian Zeng -- Investor Relations

OK. Thank you once again for joining us today. If you have any further questions, please feel free to contact uCloudlink Investor Relations through the contact information provided on our webcast or contact our investor relations firm, The Equity Group.

Operator

[Operator signoff]

Duration: 31 minutes

Call participants:

Jillian Zeng -- Investor Relations

Chaohui Chen -- Co-Founder, Director, and Chief Executive Officer

Yimeng Shi -- Chief Financial Officer

Vivian Zhang -- Diamond Equity Research -- Analyst

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